GDP Growth Revised Higher for the Second Quarter - August 29, 2012

The nation's economy, which had been estimated initially to have expanded by a tepid 1.5% in the April-through-June period, was revised to show an increase of 1.7% in the most recent quarter. The data, issued earlier this morning by the Commerce Department, will be revised once more at the end of next month.

This initial GDP revision was exactly on target with the consensus forecast for the period, but was still a bit shy of the 2.0% GDP gain tallied during the first three months of this year. Given the somewhat better tone of the economic reports in recent weeks, we believe that the second-quarter economic advance will mark the low point for the year. Our feeling is that third-quarter gross domestic product growth, or GDP, may tick up a bit closer to 2%. We expect this slightly higher level to prevail as well over the final three months of the year.

By definition, the nation's gross domestic product is the broadest measure of goods and services produced in the United States. In all, GDP has now expanded for 12 straight quarters, albeit often at pedestrian rates.

This revised report comes hours before the Federal Reserve is scheduled to release its Beige Book summation of economic activity across the United States, two days before Fed Chairman Ben S. Bernanke will speak at the Jackson Hole, Wyoming symposium on the economy, and two weeks before the central bank's next FOMC meeting. We bring up this schedule to underscore the fact that investors remain focused on what the Fed plans to do about monetary policy. Expectations have been running fairly high that the lead bank would opt for some additional monetary easing in the possible form of a third round of quantitative easing, or a QE3. Those hopes had been given a lift last week after the most recent FOMC minutes were released suggesting that the Fed might be moving in the direction of further monetary accommodation. However, this morning's GDP revision may dampen those odds ever so slightly.

On the other hand, pricing pressures remains largely absent--save for energy costs--with inflation on personal consumption expenditures, the Fed's preferred gauge for pricing, up just 1.7% in the quarter over the past year. That is notably below the central bank's target of 2.0%. So, there is some latitude for the Fed to act. However, the GDP revision and most of the recent data on the economy, save for yesterday's disquieting consumer confidence survey, suggest that there is a diminishing need for such action. We put the odds of another Fed easing at no better than 50-50.

Finally, the revision to second-quarter growth showed better-than-expected exports, lower imports (imports detract from GDP, whereas exports enhance growth), improved consumer spending and a lesser decline in government spending than initially estimated. On the other hand, business spending was revised lower.

All told, this was a mildly reassuring data issuance, and one that contrasts nicely with the generally bleaker tone seen in most releases in Europe and, lately, in China, where fears of a hard landing are increasing.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.